The Chancellor is looking to use her Budget in November to revive plans for an ISA overhaul, according to a report by The Financial Times.

Rachel Reeves is believed to be considering a cut to the tax-free cash ISA allowance, which could be halved from £20,000 to £10,000, as part of an effort to divert cash savings into the UK’s stock market.

The Chancellor has previously indicated she wants to encourage a “retail investment culture” in the UK, although held off from making changes to ISAs during her Spring Statement in March. Reeves also opted to shelve any plans for ISA reforms in July at her Mansion’s House Speech, when rumours were already circling that the Treasury was looking at reducing the tax-free ISA allowance.

However, the potential reforms could face some backlash from banks and building societies who rely on such deposits into cash ISAs to fund mortgages.

Co-founder of investment app Kaldi, Mark Burges Watson, said: “Building societies and banks are understandably nervous about reform. They rely on the deposits held in cash ISAs as a cheap source of funding for mortgages and other lending. If people start moving money out, their funding costs rise, which could push up mortgage rates.

“Using artificially cheap consumer savings in this way – to fund other priorities like mortgages or wider government investment goals – is called financial repression, and it rarely ends well.

“The UK faces a looming retirement crisis, and encouraging smarter, long-term investing is essential.”

Investment platform AJ Bell has long campaigned for a simplification of the ISA system, and director of public policy, Tom Selby, suggested the Chancellor was “absolutely right to challenge the status quo on ISAs”.

“Any reforms pursued at the Budget should focus on making it as easy as possible for those with excess cash to invest for the long-term,” Selby said. “The current fragmented market is overly complex and behaviourally illiterate, driving millions of people who could benefit from long-term investing to stick with cash, leaving them vulnerable to the impact of inflation.

“Simplifying ISAs by combining the cash and investment versions into a single product is the obvious long-term answer, making the system simpler to navigate and removing barriers between saving and investing.

“If the Government wants to send a message that it is backing UK markets as part of a retail investing drive, scrapping stamp duty on UK stocks bought within ISAs would be a straightforward, low-cost option that would be welcomed by retail investors and listed companies alike.”

Reeves will announce any new plans for ISA reform in her Budget to the House of Commons on Wednesday 26 November.

---